Nature, volume and motive behind share trading decide if profit earned therefrom is cap gain or business income

Where Assessing Officer without examining various aspects of share transactions entered into by assessee, viz., nature and volume of transactions, period of holding and motive behind same, opined that assessee was investor in shares and income arising from sale of shares was taxable as capital gain, order so passed was

erroneous and prejudicial to interest of revenue and, thus, Commissioner was justified in revising same under section 263

  

IN THE ITAT MUMBAI BENCH 'B'

Manmohak Properties (P.) Ltd.

v.

Commissioner of Income-tax

SANJAY ARORA, ACCOUNTANT MEMBER
AND Amit Shukla, JUDICIAL MEMBER

IT Appeal No. 3605 (Mum.) of 2011
[ASSESSMENT YEAR 2006-07]

SEPTEMBER  27, 2013 

Section 45, read with section 263 of the Income-tax Act, 1961 - Capital gains - Chargeable as [Business income v. Capital gains : Share dealings] - Assessment year 2006-07 - Assessee was engaged in business of investment in shares and property - It filed return declaring capital gain arising from sales of shares - Assessing Officer passed assessment order under section 143(3) treating income in question as short term capital gain - Commissioner noted that Assessing Officer had not applied his mind on various aspects of transactions entered into, viz., nature and volume of transactions; period of holding, and motive behind same, which he was in fact required to - He thus passed a revisional order holding that assessee was engaged in speculative transactions, which could by no means be treated as investments, whether short-term or long-term - Whether in view of fact that scrip-wise, date-wise details were not available before Assessing Officer in absence of which no meaningful analysis could in fact have been made or carried out by him, impugned revisional order was justified and, thus, same deserved to be upheld - Held, yes [Para 4][In favour of revenue]

FACTS

■		The assessee was engaged in the business of investment in shares and property. It filed return declaring capital gain arising from sale of shares.
■		The Assessing Officer passed assessment order under section 143(3) treating income in question as short-term capital gain.
■		The Commissioner noted that the Assessing Officer had not applied his mind on the various aspects of the transactions entered into, viz., the nature and volume of transactions; the period of holding, and the motive behind the same which he was in fact required to.
■		He thus passed a revisional order taking a view that the assessee was engaged in speculative transactions, which could by no means be treated as investments, whether short-term or long-term.
■		On appeal:

HELD

■		The absence or lack of enquiry, or not so, is a matter of fact. As such, absence or lack of enquiry, resulting in an order being per se erroneous insofar as it is prejudicial to the interest of revenue, would need to be established as a matter of fact, the onus for which is clearly on the revenue so that the matter turns essentially on the facts as brought on record.
■		Coming to the facts of the case, the Commissioner had, on an examination of the record, issued definite findings of fact, which clearly exhibited that the assessee may be trading in shares, and that he could not be regarded as an investor without further enquiry in the matter, bringing further material on record. [Para 3.3]
■		The assessee has not been able to controvert clear findings of fact by the Commissioner in any manner. In fact, the scrip-wise, date-wise detail were not available before the Assessing Officer in the absence of which no meaningful analysis could in fact have been made or carried out by him.
■		It is trite law that an absence or even lack of proper enquiry, so that there has not been proper application of mind in the matter, would lead to a valid assumption of jurisdiction under section 263. Therefore, there is no infirmity in the impugned order passed by the Commissioner. [Para 4]

CASES REFERRED TO

Smt. Sadhana Nabera [IT Appeal No. 2586 (Mum.) of 2009, dated 26.03.3010] (para 4), CIT v. Gopal Purohit [2011] 336 ITR 287/[2010] 188 Taxman 140 (Bom) (para 4) and Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 4).

Hariom Tulsyan  for the Appellant. Preetam Singh  for the Respondent.

ORDER

Sanjay Arora, Accountant Member - This is an Appeal by the Assessee contesting the Order by the Commissioner of Income Tax-1, Mumbai ('CIT' for short) dated 24.03.2011 under section 263 of the Income-tax Act, 1961 ('the Act' hereinafter) passed in its case for the assessment year (A.Y.) 2006-07.

2.1 Opening the arguments for and on behalf of the assessee, it was submitted by the ld. Authorized Representative (AR), its counsel, that the assessee challenges the impugned order both on jurisdiction as well as on merits. The assessee was during the course of the assessment proceedings required by the Assessing Officer (A.O.) to furnish the details of the investment (vide order sheet entry dated 04.11.2008), as also the details of the Security Transaction Tax (STT) and Service Tax (ST), which was duly done. It was noted by the A.O. that the assessee is in the business of investment in shares and property. Accordingly, the capital gain arising on the sale of shares, i.e., Rs. 21,26,627/-, was assessed as such u/s.111A of the Act; the entire gain being on the transfer of equity shares, being short term capital assets and, thus, assessable as short term capital gain (STCG); the transactions having suffered STT, vide order u/s.143(3) dated 12.12.2008. He would also take us to the scrip-wise details of the investment held as at the year-end (31.03.2006), as also at the immediately preceding year-end (31.03.2005), forming part of the assessee's balance-sheet (PB pgs.39-40); the details of the STT (PB pgs.41-43); and ST (PB pgs.44-46), as also the scrip-wise summary of the total gain for the year (PB pgs.50-52), all of which were duly filed before the A.O. during the assessment proceedings. As such, there was no scope for drawing an inference that there had been no proper examination of the matter at the end of the A.O. during the assessment proceedings. The A.O. having taken one of the reasonable views possible, there is no scope for interference u/s.263, which aspect is well settled. No doubt, as stated by the ld. CIT, there has been no discussion with regard thereto in the body of the assessment order, but the presumption in law would only be that there has been due application of mind, referring to the decisions in the case of Paul Mathews & Sons v. CIT [2003] 263 ITR 101/129 Taxman 416 (Ker.) and CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1/123 Taxman 433 (Delhi). The assessee has consistently shown it's share-holding as by way of investment. In fact, therefore, the A.O. had taken the only view possible under the circumstances.

2.2 The ld. Departmental Representative (DR), on the other hand, would take us to the findings by the ld. CIT at paras 6 to 9 (pgs.16-17) of his order. It would be apparent there-from that the assessee is engaged in speculative transactions, which could by no means be treated as investments, whether short term or long term. The A.O. has not applied his mind on the various aspects of the transactions entered into, viz. the nature and volume of transactions; the period of holding, and the motive behind the same, as he was in fact required to. The matter having been decided without making proper enquiry/investigation, the decisions in the case of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC) are clearly applicable in the facts of the case. Further, the ld. CIT has only directed the A.O. to examine the issue afresh, in light of the CBDT Circular No. 4/2007 dated 15.06.2007, also identifying the speculative transactions, i.e., which are not delivery based, and which was even otherwise incumbent on him. In other words, to decide in accordance with law after affording reasonable opportunity of being heard to the assessee. No prejudice stands thus caused to the assessee in any case, so that his order merits acceptance.

3. We have heard the parties, and perused the material on record.

3.1 The Revenue has relied on two decisions by the apex court (refer the impugned order as well as the grounds raised in appeal), and which would therefore need to be examined for their applicability. In the case of Rampyari Devi Saraogi (supra), the assessment was found to be made in undue hurry, without making proper enquiries, so that it was under the circumstances held to be erroneous insofar as it is prejudicial to the interest of the Revenue, so as to be liable for revision u/s.33B of the Income-tax Act, 1922, which is para materia to s.263 of the Act. In the case of Smt. Tara Devi Aggarwal (supra), the other case relied upon by the Revenue, despite there being material on record that should have put the A.O. on inquiry he did not cause proper verification and proceeded to make the assessment accepting the income as returned. The assessment was accordingly held as rightly subject to revision.

3.2 In this background, we may begin by delineating the issue(s) that arise before us for adjudication. The same, or the foremost among them, in our view, is the validity of the invocation of section 263 of the Act by the ld. CIT in the facts and circumstances of the case, i.e., the jurisdictional aspect. The apex court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC), explained the parameters for and conditions upon existence of which there is a valid assumption of revisionary jurisdiction u/s.263. The same is by way of a four-way test, which, succinctly put, is: incorrect assumption of facts; incorrect application of law; without applying the principles of natural justice; and without application of mind. The instant assessment stands impugned under the fourth category aforesaid. The law in the matter is well-settled, and toward which we may, apart from the decision in Malabar Industrial Co. Ltd. (supra), relied upon by the assessee itself, cite a few decisions, as Rampyari Devi Sarogi (supra); CIT v. McMillan & Co. [1958] 33 ITR 182 (SC); Jai Bharat Tanners v. CIT [2003] 264 ITR 673/128 Taxman 880 (Mad.); Ashok Leyland Ltd. v. CIT [2003] 260 ITR 599/[2002] 125 Taxman 965 (Mad.); Duggal & Co. v. CIT [1996] 220 ITR 456/[1994] 77 Taxman 331 (Delhi); Swarup Vegetable Products v. CIT [1991] 187 ITR 412/54 Taxman 175 (All.); Thalibai F. Jain v. ITO [1975] 101 ITR 1 (Kar.); Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi), to name some.

Not conduct of proper enquiry, i.e., as warranted in the facts and circumstances of the case, given the position of law in the matter, would make an order per se erroneous in-so-far as it is prejudicial to the interest of the Revenue. The principles and premises stand enumerated lucidly in Gee Vee Enterprises's case (supra). Relying on these two very decisions by the apex court, viz. Rampyari Devi Saraogi (supra) and Smt. Tara Devi Aggarwal (supra), relied upon by the Revenue before us, it stands explained that the position and function/s of an Income Tax Officer is different from that of a civil court. In its words, the statements made in a pleading proved by the minimum of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives a decision on the basis of the pleading and the evidence which comes before it. The Income-tax Officer, on the other hand, is not only an adjudicator but also an investigator. He could not remain passive in the face of a return which is apparently in order but calls for further enquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an enquiry. It is because it is incumbent on the Income Tax Officer to further investigate the facts cited in the return when circumstances would make such an enquiry prudent that the word 'erroneous' u/s.263 includes the failure to make such an enquiry. The order becomes erroneous because such an enquiry has not been made, and not because there is anything wrong with the order if all the facts therein are assumed to be correct. This has, over the years, translated into a series of decisions by the hon'ble courts of law, to some of which we have referred to earlier, and which forms the basis of our stating of it as being trite law.

That being the case, the decisions cited by the assessee in its favour can only be regarded as having been rendered in the facts of the case. In Paul Mathews & Sons (supra), the basis of the revision by the CIT was a disregard of the assessee's statement u/s.133A by the assessing authority, which was found by the hon'ble court as not a valid basis. This was as sec. 133A did not empower the A.O. to examine any person on oath. In fact, the assessee had shown his admission during survey to be a mistake by cogent material during the assessment proceedings. It was under these circumstances that the assessee's claim/s qua its statement was accepted by the AO. Further, the A.O. was found to have framed the assessment on due consideration of the material on record, applying his mind to the various aspects of the assessment, partly accepting the assessee's case. It is in view of these findings, which are findings of fact, that the hon'ble court found no case for revision, relying in fact for legal support on the same decisions as by the Revenue before us, i.e., in the case of Malabar Industrial Co. Ltd. (supra) and Tara Devi Agarwal (supra).

The decision in the case of Kelvinator of India Ltd. (supra) would not apply inasmuch as the same is qua reassessment, so that a change of opinion would invalidate reassessment proceedings. This is as the law does not provide for review of his order by the assessing authority, while section 263 specifically confers power of review of its order by the CIT, and on the basis of record as available with the latter. The only condition though for an interference by him is that the same must exhibit the order to be erroneous and prejudicial to the interest of the Revenue. As such, we are unable to see as to how the said decision is applicable in the facts of the case, which would stands to be decided by us on the finding of existence or otherwise of proper enquiry by the A.O.

3.3 Continuing further, the absence or lack of enquiry, or not so, is a matter of fact. As such, absence or lack of enquiry, resulting in an order being per se erroneous insofar as it is prejudicial to the interest of the Revenue, would need to be established as a matter of fact, the onus for which is clearly on the Revenue, so that the matter turns essentially on the facts as brought on record.

Coming to the facts of the case, we observe that the ld. CIT has, on an examination of the record, issued definite findings of fact, as under, which clearly exhibit that the assessee may be trading in shares, and that he could not be regarded as an investor without further enquiry in the matter, bringing further material on record:

-		the activity code and the description per the assessee's return of income is: '0204 -Trading (Others)' and 'Trading in investment in shares & securities' (para 4 of the impugned order);
-		instances of purchase and sale of shares without delivery, though the profit and loss on these transactions has been classified and returned as STCG by the assessee, as gathered from the scrip-wise, date-wise details (para 6 of the impugned order);
-		the assessee had sold all the shares brought forward by it as on 01.04.2005, again buying the same stock (para 8);
-		the volume and frequency of transactions, a number of scrips traded in (para 8 of the impugned order).

Accordingly, directions were issued by the ld. CIT vide para 10 of his order to the A.O. to decide the issue of taxability of the impugned 'gains' afresh in accordance with the law, keeping the CBDT circular/s in view, by issuing definite findings of fact and after allowing the assessee proper opportunity of being heard.

Decision

4. We find that the assessee has not been able to controvert clear findings of fact by the ld. CIT in any manner. In fact, as also observed during hearing, the scrip-wise, date-wise detail, as reproduced at para 5 (pgs.6-15) of the impugned order, were not before the A.O., in the absence of which no meaningful analysis could in fact have been made or carried out by him. It is trite law that an absence or even lack of proper enquiry, so that there has not been proper application of mind in the matter, would lead to a valid assumption of jurisdiction u/s. 263. We, therefore, find no infirmity in the order by the ld. CIT, including his directions per para 10 of his order. The only modification or reservation which we may express is that, each case being rendered on its facts, the reference by him to the decision in the case of Smt. Sadhana Nabera (in ITA No.2586/Mum/2009 dated 26.03.2010) to the A.O., would only be with regard to its ratio. Subject to this, therefore, the impugned order is upheld. We decide accordingly.

Before parting with the order, we may also clarify that the assessee's reliance on the decision in the case of CIT v. Gopal Purohit [2011] 336 ITR 287/[2010] 188 Taxman 140 (Bom) in the matter is misplaced; the issue, as afore-stated, being based principally on facts, so that it gets to be decided thereon, with the law in fact being well settled. The principle of res judicata is even otherwise not applicable to the proceedings under the Act, with further there being no estoppel against law, so that the rule of consistency, as advocated therein, is subject to constraints, even as explained by the hon'ble jurisdictional high court itself in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom).

5. In the result, the assessee's appeal is dismissed.

Refer:[2013] 39 taxmann.com 105 (Mumbai - Trib.)